The microeconomic effects of trade liberalization in Kenya

Abstract

The objective of this study is to determine what effect trade liberalization has had on the economic growth rate, the balance of trade and employment in Kenya. The study is motivated by the lack of theoretical and empirical consensus on the macroeconomic effects of trade liberalization in developing countries and by the absence of adequate empirical analysis on this issue in the case of Kenya. The importance of this study lies in its role in evaluating existing trade policy in Kenya and in prescribing preferable policies for the future. The major components of trade liberalization programs namely: reductions in quantitative restrictions tariff rate reductions, tariff rationalization and exchange rate changes, are used to construct a direct measure of Kenya's trade policy for the period 1963 1990. This measure is then related to the target macroeconomic variables using econometric as well econometric techniques. One of the findings of the study is that liberalization has impacted negatively on 'the economic growth rate. This is partly attributed to another finding that trade liberalization has not significantly increased exports as expected. However, the study finds that trade liberalization does not adversely affect; the balance of trade and also finds no significant effect of trade liberalization on employment. The emergent.policy implication from the findings is the crucial need for supportive policies to accompany trade liberalization particularly policies to ensure that the export sector can respond to the incentives offered by trade liberalization packages.